product strategy

A huge challenge for user-generated websites is overcoming the chicken-and-egg problem: attracting users and contributors when you are starting with zero content. One way to approach this challenge is to use what Geoffrey Moore calls the bowling pin strategy: find a niche where the chicken-and-egg problem is more easily overcome and then find ways to hop from that niche to other niches and eventually to the broader market.

Facebook executed the bowling pin strategy brilliantly by starting at Harvard and then spreading out to other colleges and eventually the general public. If Facebook started out with, say, 1000 users spread randomly across the world, it wouldn’t have been very useful to anyone. But having the first 1000 users at Harvard made it extremely useful to Harvard students. Those students in turn had friends at other colleges, allowing Facebook to hop from one school to another.

Yelp also used a bowling pin strategy by focusing first on getting critical mass in one location – San Francisco – and then expanding out from there. They also focused on activities that (at the time) social networking users favored: dining out, clubbing and shopping. Contrast this to their direct competitors that were started around the same time, were equally well funded, yet have been far less successful.

How do you identify a good initial niche? First, it has to be a true community – people who have shared interests and frequently interact with one another. They should also have a particularly strong need for your product to be willing to put up with an initial lack of content. Stack Overflow chose programmers as their first niche, presumably because that’s a community where the Stack Overflow founders were influential and where the competing websites weren’t satisfying demand. Quora chose technology investors and entrepreneurs, presumably also because that’s where the founders were influential and well connected. Both of these niches tend to be very active online and are likely to have have many other interests, hence the spillover potential into other niches is high. (Stack Overflow’s cooking site is growing nicely – many of the initial users are programmers who crossed over).

Location based services like Foursquare started out focused primarily on dense cities like New York City where users are more likely to serendipitously bump into friends or use tips to discover new things. Facebook has such massive scale that it is able to roll out its LBS product (Places) to 500M users at once and not bother with a niche strategy. Presumably certain groups are more likely to use Facebook check-ins than others, but with Facebook’s scale they can let the users figure this out instead of having to plan it deliberately. That said, history suggests that big companies who rely on this “carpet bombing strategy” are often upended by focused startups who take over one niche at a time.

Your #1 competitor starting out will always be the BACK button, nothing else. – Garry Tan

Suppose you have an idea for a startup, and then do some research only to discover there are already similar products on the market. You become disheartened and wonder if you should abandon your idea.

In fact, the existence of competing products is a meaningful signal, but not necessarily a negative one. Here are some things to consider.

1) Almost every good idea has already been built. Sometimes new ideas are just ahead of their time. There were probably 50 companies that tried to do viral video sharing before YouTube. Before 2005, when YouTube was founded, relatively few users had broadband and video cameras. YouTube also took advantage of the latest version of Flash that could play videos seamlessly.

Other times existing companies simply didn’t execute well. Google and Facebook launched long after their competitors, but executed incredibly well and focused on the right things. When Google launched, other search engines like Yahoo, Excite, and Lycos were focused on becoming multipurpose “portals” and had de-prioritized search (Yahoo even outsourced their search technology).

2) The fact that other entrepreneurs thought the idea was good enough to build can be a positive signal. They probably went through some kind of vetting process like talking to target users and doing some market research. By launching later, you can piggyback off the work they’ve already done. That said, you do need to be careful not to get sucked into groupthink. For example, many techies follow the dictum “build something you would use yourself,” which leads to a glut of techie-centric products. There are tons Delicious and Digg clones even though it’s not clear those sites have appeal beyond their core techie audience.

3) That other people tried your idea without success could imply it’s a bad idea or simply that the timing or execution was wrong. Distinguishing between these cases is hard and where you should apply serious thought. If you think your competitors executed poorly, you should develop a theory of what they did wrong and how you’ll do better. Group buying had been tried a hundred times, but Groupon was the first to succeed, specifically by using coupons to track sales and by acquiring the local merchants first and then getting users instead of vice versa. If you think your competitor’s timing was off, you should have a thesis about what’s changed to make now the right time. These changes could come in a variety of forms: for example, it could be that users have become more sophisticated, the prices of key inputs have dropped, or that prerequisite technologies have become widely adopted.

Startups are primarly competing against indifference, lack of awareness, and lack of understanding — not other startups. For web startups this means you should worry about users simply not coming to your site, or when they do come, hitting the BACK button.

My Hunch cofounders and I frequently ask ourselves: “If we were to start over today, would we build our product the same way we had so far?” This exercise is meant to counter a number of common cognitive biases, such as:

1. The sunk costs trap. People tend to overvalue past investments when making forward-looking investment decisions. From the rumors I’ve heard, Joost was a company that fell into the sunk costs trap. In the beginning, their p2p architecture was their main differentiator. Thus they invested a lot in building p2p infrastructure and required users to download a software client. When browser-based web video companies like Hulu and YouTube surpassed them, Joost switched to a browser-based client but still required a special plugin so they could maintain their p2p architecture. In fact, the problem the p2p architecture was solving – reducing bandwidth costs – had, in the meantime, become a secondary basis of competition. By the time Joost finally discarded the p2p model, it was too late.

2. The Bridge on the River Kwai syndrome. This is when entrepreneurs fall so in love with their engineering project qua engineering project that they lose site of the larger mission. Former engineers (like me) are particularly susceptible to this as we often get excited about technology for its own sake. Many products can be built much more quickly and cheaply by settling for good technology plus a bunch of hacks – human editing, partnerships, using 3rd party software – versus creating a perfect technology from scratch. At my last company, SiteAdvisor, we made the decision up front to build a non-perfect system that did 99% of what a much more expensive, “perfect” technological solution would have done. The software wasn’t always pretty – to the annoyance of some of our engineers – but it worked.

3. Solving the wrong problem. Location-based social networks have been around for years. Foursquare came along just a year ago and has seemingly surpassed its predecessors. The other companies built elaborate infrastructures: e.g they partnered with wireless carriers so that users’ locations could be tracked in the background without having to “check-in”. Foursquare built a relatively simple app that added some entertaining features like badges and mayorships. It turned out that requiring users to manually check in was not only easier to build but also appealing as users got more control over their privacy. Foursquare’s competitors were solving the wrong problem.

Ask yourself: if you started over today, would you build the same product? If not, consider significant changes to what you are building. The popular word for this today is “pivoting” and I think it is apropos. You aren’t throwing away what you’ve learned or the good things you’ve built. You are keeping your strong leg grounded and adjusting your weak leg to move in a new direction.

The first million people who bought VCRs bought them before there were any movies available to watch on them. They just wanted to “time shift” TV shows – what we use DVRs for today. Once there were millions of VCR owners it became worthwhile for Hollywood to start selling and renting movies to watch on them. Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. Thus, a product that eventually had very strong network effects* got its initial traction from a “standalone use” – where no other VCR owners or complementary products needed to exist.

I was talking to my friend Zach Klein recently who referred to products as having single player and multiplayer modes. I like Zach’s terminology because: 1) it is borrowed from video games where a lot of thought has gone into making these modes compelling in distinct ways, 2) the word “mode” reminds us that people can switch from moment to moment – that even when a product is primarily social or networked and has reached critical mass it might still be useful to offer a single player mode.

Many products that we think of as strictly multiplayer also have single player modes. In many cases this single player mode helped adoption in the early stages when the network effects were not yet strong. For example, you could use Flickr just to store photos privately if you wanted to. I thought of Foursquare as strictly multiplayer until my Hunch cofounder Tom Pinckney told me he uses it solely to keep track of restaurants he’s gone to so he’ll remember which ones to go back to. For some products it’s really hard to imagine single player modes. This is true of pure communication products like Skype and perhaps also social networks like Facebook (although apps like games seem to have provided single player modes for Facebook).

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* Products with so-called networks effects get more valuable when more people use them. Famous examples are telephones and social networks. Network effects can be your friend or your enemy depending on whether your product has reached critical mass. Getting to critical mass in network effect markets is sometimes called overcoming the “chicken and egg problem.” More here.

Google is fighting battles on almost every front: social networking, mobile operating systems, web browsers, office apps, and so on. Much of this makes sense, inasmuch as it is strategic for them to dominate or commoditize each layer that stands between human beings and online ads. But while they are doing this, they are leaving their core business vulnerable, particularly to Amazon.

[Google] competes with Amazon in a number of areas, particularly web services and big data. And down the road, Google may compete directly in other ways as well. Froogle was a flop, but don’t think Google doesn’t want a bigger chunk of ecommerce revenue from people who begin their product searches on their search engine.*

In fact, Google and Amazon’s are already direct competitors in their core businesses. Like Amazon, Google makes the vast majority of its revenue from users who are looking to make an online purchase. Other query types – searches related to news, blog posts, funny videos, etc. – are mostly a loss leaders for Google.

The key risk for Google is that they are heavily dependent on online purchasing being a two-stage process: the user does a search on Google, and then clicks on an ad to buy something on another site. As long as the e-commerce world is sufficiently fragmented, users will prefer an intermediary like Google to help them find the right product or merchant. But as Amazon increasingly dominates the e-commerce market, this fragmentation could go away along with users’ need for an intermediary.**

Moreover, Google’s algorithmic results for product searches are generally poor. (Try using Google to decide what dishwasher to buy). These poor results might actually lead to short term revenue increases since the sponsored links are superior to the unsponsored ones. But long term if Google continues producing poor product search results and Amazon continues consolidating the e-commerce market, Google’s core business is at serious risk.

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* Froogle (and Google Products) have been unsuccessful most likely because Google has had no incentive to make them better: they make plenty of money on these queries already on a CPC basis, and would likely make less if they moved to a CPA model.

** Most Amazon Prime customers probably already do skip Google and go directly to Amazon. I know I do.